what I am learning about the housing bubble

[grapejelly]

I am publishing Mortgage Relief Formula, a home study course on debt relief and mortgage relief. It's at http://www.MortgageReliefFormula.com which I blog at also.

It's been very illuminating. I got 40 questions or so from people just yesterday and maybe 3 or 4 detailed emails every day with people's situation.

Best I can see it, there are a whole lot of people who are living in houses they can not afford, period.

That's the bottom line.

They have not yet adjusted their thinking to a simple fact: They may be better off getting rid of their house and renting!

It is not always good to be a homeowner. The bailout that is being contemplated will in the short term help the stocks of the financial companies but what most folks need is a realistic assessment of their own situation and the willingness to see getting out and not paying anymore as being often best.

[Uncle Jack]

Re: what I am learning about the housing bubble

Is that Gilbert Gottfreid in that picture?

[metalman]

Re: what I am learning about the housing bubble

I am publishing Mortgage Relief Formula, a home study course on debt relief and mortgage relief. It's at http://www.MortgageReliefFormula.com which I blog at also.

It's been very illuminating. I got 40 questions or so from people just yesterday and maybe 3 or 4 detailed emails every day with people's situation.

Best I can see it, there are a whole lot of people who are living in houses they can not afford, period.

That's the bottom line.

They have not yet adjusted their thinking to a simple fact: They may be better off getting rid of their house and renting!

It is not always good to be a homeowner. The bailout that is being contemplated will in the short term help the stocks of the financial companies but what most folks need is a realistic assessment of their own situation and the willingness to see getting out and not paying anymore as being often best.

good advice now but better in 2005. my theory: everyone who was ever gonna be smart has already been smart. everyone else is fucked.

[c1ue]

Re: what I am learning about the housing bubble

Metalman,

I agree with you, but there are still degrees of being screwed.

Getting people to overcome their innate human aversion to loss would probably save them 3-5 years of daily agony and in turn accelerate their eventual ability to recover.

That's why I bother to post here - my hope is that the possible horrific realities of the present situation will be understood enough that at least some people will be willing to take the radical steps to protect themselves.

Surprise is in the mind of the observer.

[jk]

Re: what I am learning about the housing bubble

good advice now but better in 2005. my theory: everyone who was ever gonna be smart has already been smart. everyone else is fucked.

what do we need to be smart about NOW, metalman?

[grapejelly]

Re: what I am learning about the housing bubble

sure, it would have been great to sell in 2005. In fact, I did. But many didn't. They are in more and more of a mess...and get this, a lot of folks are asking "how do I buy these houses to take advantage of today's low house prices?"

See, they don't get it...they don't realize how much worse things probably will get (although things may get better and I could be wrong.)

[zoog]

Re: what I am learning about the housing bubble

good advice now but better in 2005. my theory: everyone who was ever gonna be smart has already been smart. everyone else is fucked.

"Objection!" I wouldn't consider it that black & white. As c1ue said:

I agree with you, but there are still degrees of being screwed...

I wasn't smart / lucky enough to see a housing bubble in 2005, but in time I came to suspect the situation was out of whack and eventually I found iTulip and other helpful sites.

They have not yet adjusted their thinking to a simple fact: They may be better off getting rid of their house and renting!

I adjusted my thinking and am trying to get rid of my house and rent. So, maybe I'm not as smart as people who got out 2005, but smarter than people who are still holding on, or people who think there are "bargains" in the housing markets today.

...and get this, a lot of folks are asking "how do I buy these houses to take advantage of today's low house prices?"

A coworker of mine is one of these people. Someone suggested he talk to me. Hopefully I at least put the seeds of doubt in his mind.

Anyway, there are varying degrees of smart / screwed as far as the housing bubble goes. I may have been naive enough to buy near the peak, but I was financially prudent enough to not believe what the mortgage broker said I could afford. I ran very careful and thorough budgetary analysis, including five years of future projections, and accordingly bought a house with payments I could really afford. Thus, less pain in trying to sell. Worst-case, I can just stay in the house. Much better off than most people trying to sell these days.

There is still hope for some people who are just now beginning to wake up. "Your first loss is your best loss", right? Better late than really late.

[Guest]

Re: what I am learning about the housing bubble

Zooger --

If you sell your home in the next six months (mark your calendar to today) I undertake to send you FOUR cases of your own choice of premium beer that can be purchased in San Diego. Shipping is on me too. I'm rooting for you pal.

If you sell in the next year, I'll mail you two cases.

My only stipulation will be that you have to drink them all in one sitting. Your wife and kids (and your friends too if you like) have been dragooned to be the legal witnesses.

Now go to it.

[zoog]

Re: what I am learning about the housing bubble

Zooger --

If you sell your home in the next six months (mark your calendar to today) I undertake to send you FOUR cases of your own choice of premium beer that can be purchased in San Diego. Shipping is on me too. I'm rooting for you pal.

If you sell in the next year, I'll mail you two cases.

My only stipulation will be that you have to drink them all in one sitting. Your wife and kids (and your friends too if you like) have been dragooned to be the legal witnesses.

Now go to it.

Ha! I think that would be the end of me.:p:eek:

Don't know if anyone beyond the West Coast is aware we had a tremendous set of storms over the weekend here in the PNW, tons of rain and strong winds. Highest wind gust I saw reported on the coast was 129mph at Bay City, OR, and most rainfall I saw mentioned was 10.78 inches in 24 hours in Bremerton, WA. Many coastal and river communities faced the worst flooding since 1996. I-5, the main north-south West Coast artery, remains completely shut down near Chehalis, WA, with ten feet of water over the roadway at one point.

Flooding in the Portland and Seattle metro areas was less severe, but no doubt some homes were lost. I was shopvac'ing water in my basement, and complaining about it mightily, but it was really nothing, absolutely pales in comparison to what I saw on the news. I am thankful to be above the floodplain.

I doubt this will have any mitigating effect on our housing bubble correction, but it may keep remodeling contractors busy for a while.

[jimmygu3]

Re: what I am learning about the housing bubble

good advice now but better in 2005. my theory: everyone who was ever gonna be smart has already been smart. everyone else is fucked.

If my house were a stock I would have sold it. There are definitely other assets more likely to hold their value. But my house is my family's home and I'm prepared to ride out the storm in it. If I were to sell and stay in my neighborhood, we would have to rent a smaller house and basically break even on a monthly payment, tax-adjusted basis. So in order to not be "f-ed" I'm supposed to transplant my family and turn our lives upside-down in order to pay the same amount in anticipation of a decline in prices that I will need to time just right to get back into the market at some future point? I honestly appreciate the warning, but I'll pass.

As I have said before, I believe nationwide housing has about 20% fictitious value and that about half of that will be reflected in nominal price declines. Inflation will take care of the rest. With 70% LTV, I won't be underwater unless we see a 30+% nominal decline and I am forced out at the bottom. It could happen, but that scenario gives a lot of props to the power of the bonar vs. the value of real assets. I'm betting that the Fed will do what it does best- debase the currency. Housing prices will catch that rising tide.

Let's say for simplicity's sake I have a $100k house with a $70k mortgage. With 4% inflation for 5 years, coupled with a nominal decline of 10%, my real home value would decline 26%. Even in this gloomy scenario, I could still sell if necessary and take the $10k loss on the chin ($8,223 in 2007 dollars).

If, however, inflation averages 6% and my real value declines 20% over 5 years, I would experience that as a $7,200 nominal gain ($5,373 in 2007 dollars) upon sale.

Take the more extreme but plausible scenario with inflation at 10% http://www.nowandfutures.com/cpi_lie.html for 5 years, and even the 20% real value drop results in a $28,841 nominal gain! That's a 96% ROI on the original $30k in equity (60% real inflation-adjusted gain).

Of course, I didn't include the possibility of dollar deflation or real home values dropping more than 30% over 5 years. Anything is theoretically possible. But please don't tell me I'm "F-ed" because I own a home for my family to live in and I didn't move into an apartment in '05 like some of you.

(Smilie added to make me seem less defensive)

[grapejelly]

Re: what I am learning about the housing bubble

If my house were a stock I would have sold it. There are definitely other assets more likely to hold their value. But my house is my family's home and I'm prepared to ride out the storm in it. If I were to sell and stay in my neighborhood, we would have to rent a smaller house and basically break even on a monthly payment, tax-adjusted basis. So in order to not be "f-ed" I'm supposed to transplant my family and turn our lives upside-down in order to pay the same amount in anticipation of a decline in prices that I will need to time just right to get back into the market at some future point? I honestly appreciate the warning, but I'll pass.

As I have said before, I believe nationwide housing has about 20% fictitious value and that about half of that will be reflected in nominal price declines. Inflation will take care of the rest. With 70% LTV, I won't be underwater unless we see a 30+% nominal decline and I am forced out at the bottom. It could happen, but that scenario gives a lot of props to the power of the bonar vs. the value of real assets. I'm betting that the Fed will do what it does best- debase the currency. Housing prices will catch that rising tide.

Let's say for simplicity's sake I have a $100k house with a $70k mortgage. With 4% inflation for 5 years, coupled with a nominal decline of 10%, my real home value would decline 26%. Even in this gloomy scenario, I could still sell if necessary and take the $10k loss on the chin ($8,223 in 2007 dollars).

If, however, inflation averages 6% and my real value declines 20% over 5 years, I would experience that as a $7,200 nominal gain ($5,373 in 2007 dollars) upon sale.

Take the more extreme but plausible scenario with inflation at 10% http://www.nowandfutures.com/cpi_lie.html for 5 years, and even the 20% real value drop results in a $28,841 nominal gain! That's a 96% ROI on the original $30k in equity (60% real inflation-adjusted gain).

Of course, I didn't include the possibility of dollar deflation or real home values dropping more than 30% over 5 years. Anything is theoretically possible. But please don't tell me I'm "F-ed" because I own a home for my family to live in and I didn't move into an apartment in '05 like some of you.

(Smilie added to make me seem less defensive)

the trouble with housing inflation bailing out the housing crisis is that credit seems destined to become much more expensive, at least to me. That will mean that both real and nominal prices will fall. If only real prices fall much...well then, that would mean we have had very high inflation driving up wages and salaries, and that would be catastrophic in the sense that the late 1970s would seem like a picnic in comparison.

[jk]

Re: what I am learning about the housing bubble

the trouble with housing inflation bailing out the housing crisis is that credit seems destined to become much more expensive, at least to me. That will mean that both real and nominal prices will fall. If only real prices fall much...well then, that would mean we have had very high inflation driving up wages and salaries, and that would be catastrophic in the sense that the late 1970s would seem like a picnic in comparison.

......poom

[Guest]

Re: what I am learning about the housing bubble

POOM! Mega-Bada-Poom!

[jimmygu3]

Re: what I am learning about the housing bubble

the trouble with housing inflation bailing out the housing crisis is that credit seems destined to become much more expensive, at least to me. That will mean that both real and nominal prices will fall. If only real prices fall much...well then, that would mean we have had very high inflation driving up wages and salaries, and that would be catastrophic in the sense that the late 1970s would seem like a picnic in comparison.

Check out this chart I created of US housing since 1930 priced in gold grams per square foot.

At a current value of 3.4 gold grams/sq ft (gg/sf), housing priced in gold is already at a historically low level seen only in the period around 1935 and 1980. 1980's all-time low of 1.8 gg/sf was followed by a sharp reversal to 4.2 gg/sf by 1985, even with tight credit, a recession and record high rates.

Aren't we to expect that at some point we will revert to the mean of about 5 gg/sf? The only way to get there is for nominal housing prices to outpace gold by 50%! If one expected gold to drop 50%, he could argue that housing will drop 25% to accomplish the mean reversion.

But this is iTulip, land of $2,500 gold! The data point in the chart for 2012 is assuming EJ's target price is reached in 5 years and housing prices stay flat. The result would be housing for 1.1 gg/sf, a historical low 39% below the bottom in 1980 and 66% lower than the bottom of the great depression. Of course if you factor in a nominal drop in housing prices, as nearly everyone here seems to expect, the price in gg/sf drops even further off the charts.

Why is it so hard for us to believe that it will take more of this Monopoly money to pay for a house in the future? In Argentina, housing prices following the 2001 currency crisis immediately went down 50% in "real" USD terms, but up 60% in local currency. In the intervening 6 years, amidst terrible unemployment, financial, social and political turmoil, prices have climbed an additional 70% in both USD and pesos. Nominal housing prices in Argentina now stand at roughly 3 times pre-crisis levels.

The US is not Argentina, but I know a lot of Argentines and they feel foolish for ever having faith in a currency that was so overvalued. Real assets were the place to store wealth in their crisis. I believe it will be in ours as well.

[jk]

Re: what I am learning about the housing bubble

we've got a housing glut right now that will take years to work off. i also question the chart of housing/gold since gold's price was fixed much of the time. gold is viewed as the pure play on inflation and currency devaluation- so i'd expect its nominal value to continue to rise.

argentina is indeed a good example - you said that when the crisis hit the price of houses halved in u.s. dollars, doubled in argentine pesos. houses in the u.s. have ALREADY doubled in u.s. dollars, they are now in the process of halving in terms of gold.